Macroeconomics must take radical uncertainty into account, if it aims at contributing to the solution of serious real-world problems such as climate change. Allowing for radical uncertainty must happen at two levels: the level of modeling and the level of the scientific discipline. I argue that...

An issuer, privately informed about the distribution of the project's cash flows, raises financing from an uninformed investor through a security sale. The investor faces Knightian uncertainty about the distribution of cash flows and evaluates each security by the worst-case distribution at...

We analyze the role of risk limits in the provision of incentives to acquire valuable information for efficient risk management. We study the optimal contract of a trader who (a) must privately exert costly effort in order to collect information and (b) may have access to a costly second opinion...

This paper studies general health insurance markets. It proposes an ex post risk adjustment scheme that discourages risk selection and promotes efficient competition. Under the proposed risk adjustment scheme, the regulator engages in transfers that are conditional on the ex post profits of...

I study optimal financial contracting when neither cash flows nor the risk profile of project choices are verifiable. Using a contracting framework, I show the resulting two frictions (cash-diversion and asset-substitution) are intricately linked: to address the cash-diversion problem, an...

This study analyzed the principal-agent problem, in which the agent performs risk management tasks, and considered the cost minimization problem of the principal, the objective of which is to design the cheapest contract inducing a target effort. Our results confirm that a one-step bonus...

We develop a theory of “risky utilities”, i.e. private firms that manage an infrastructure for public service, and that may be tempted to engage in excessively risky activities, such as reducing maintenance expenditures (at the risk of provoking a break-down of the system) or in speculation...

The extant literature has used measurements of CEO risk-taking incentives which do not include the effects of termination provisions such as severance agreements. This paper provides a general form model that allows for the valuation and computation of CEO compensation structures including...

Diversification through a financial intermediary has the benefit of transforming loans that need costly monitoring into bank deposits that do not. We show, however, that financial intermediation in a costly state verification model has a cost not yet analyzed: it allows for the existence of...

We study a continuous time contracting problem with risk taking in which size plays a role. The agent may take on excessive risk to enhance short-term gains; doing so exposes the principal to large, infrequent (poisson) losses. The optimal contract must use size as an instrument; there is...